The Age of Turbulence: Adventures in a New Worldby Alan Greenspan531pp, Allen Lane, £25

Alan Greenspan is famously a libertarian Republican. He is also, it turns out, a Brownite, not a Blairite. In the autumn of 1994, shortly after Labour's leadership election, Tony Blair and Gordon Brown made a pilgrimage to Washington. They "trekked into" Greenspan's office at the Federal Reserve. It was a happy meeting of minds. They empathised warmly on the merits of globalisation, and reassured each other of their mutual belief in free markets. Greenspan was impressed by the extent to which they espoused Fabian socialism only "in its most diluted form".

He also reached a rapid judgment on who wore the trousers. "As we exchanged greetings, it appeared to me that Brown was the senior person. Blair stayed in the background while Brown did most of the talking." Of course if they had strayed on to foreign policy, things would have been different. But there they would have found much less common ground. Greenspan is not a fan of Bush's messianic attempts to spread democracy in the Middle East. "I am saddened," he says, "that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

Unfortunately, Greenspan does not warm to that theme. The Age of Turbulence is, in a sense, a work of political economy, but the economy dominates the politics. We learn of his intellectual formation under the tutelage of Ayn Rand, whose doorstopping novels are enjoying a mini revival, and his deep suspicion of the ability of governments to do anything very useful. But the substance of his own breezeblock is a detailed apologia for the decisions made during his awe-inspiring 19-year tenure at the Fed. Only once does he acknowledge a significant error - when he appeared to endorse George Bush's tax cuts - and that was more of presentation than of substance. His criticism of the administration's fiscal policy now, however, is severe.

Inevitably, we now see his tenure through the prism of the current financial situation. Crisis may be too strong a word, but turbulence is certainly accurate. How far should the Fed be held responsible for sowing the seeds of the whirlwind by running an excessively lax monetary policy and, as a regulator, turning a blind eye to the explosion in subprime mortgages and the rapid growth of complex credit derivatives?

On interest rates, Greenspan is unrepentant, and presents a persuasive defence of his reaction to the World Trade Center attacks, the dotcom boom and the collapse of the LTCM hedge fund. Much of this is familiar territory. On the subprime market he articulates a highly political argument for the Fed's tolerant attitude: "The benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support."

But on the explosion of credit he is far more nuanced and pessimistic. He sees the underlying cause of the current market turmoil as the persistent fall in risk premiums over the past five years. The spreads of junk bonds over US Treasuries in early summer, before the troubles hit, were "mind-bogglingly low". And as he said in his last speech as chairman of the Fed in 2005: "History has not dealt kindly with the aftermath of protracted periods of low risk premiums." We are clearly in the middle of a bout of capitalised Historical Revenge just now.

So shouldn't he have spent his last years in office nipping buds and sewing stitches in time? Here we get an exposition of what we might call the Ayn Rand theory of financial regulation. While he has doggedly defended the Fed's continued role in banking supervision, it turns out that he had serious doubts about its effectiveness, right from the start. "Since I was an outlier in my libertarian opposition to most regulation, I planned to be largely passive in such matters ... " And his doubts strengthened as time went by. "Only belatedly did I realise that the power to regulate administratively was fading. Regulators can pretend to provide oversight, but their capabilities are much diminished and declining." In practice they have to rely on "counterparty surveillance to do the heavy lifting".

This may be an excessively negative view of the utility of regulatory authorities. They can play a useful role in warning overenthusiastic market participants, and reviving the memory of past excesses. Like old men, traders forget. Alan Greenspan did some of that Cassandran work himself in his time. But his limited vision is a useful corrective to the prevailing view that if a financial firm runs into trouble as a result of a flawed strategy it is the regulators and the central bank who are primarily responsible, and must be held to account, rather than the management and the counterparties who devised and facilitated that strategy.

And Greenspan is certainly correct to point out that government regulation cannot substitute for individual integrity, and that "any form of government guarantees of credit lessens the need of financial counterparties to earn a reputation for honest dealings". Even deposit protection, he argues, has costly consequences.

These wise words are, of course, set in a US context. His prime concern is the growth of regulation which, as he sees it, can offer false comfort. The 2002 Sarbanes Oxley Act, which has greatly increased audit costs in US companies, is the prime target in his sights. But his point that "regulation approved in a crisis must subsequently be fine-tuned" is of general application. Alastair Darling might well need to bear it in mind as he reflects on the government's response to the Northern Rock problem. Howard Davies is director of the London School of Economics and chairman of the Man Booker prize.